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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from to
COMMISSION FILE NO. 0-5351
EIP MICROWAVE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-2148645
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4500 CAMPUS DRIVE, SUITE 219
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices) (Zip Code)
(714) 851-3177
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$.01 PAR VALUE
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the fiscal year ended September 30, 1997, were
$4,739,000. The aggregate market value of the voting stock held by
non-affiliates of the issuer, computed by reference to the average bid and asked
prices as of December 23, 1997, was approximately $405,000. For purposes of
this determination only, directors and officers of the issuer have been assumed
to be affiliates. There were a total of 424,907 shares of the issuer's common
stock outstanding as of December 23, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Definitive Proxy Statement filed with Securities and
Exchange Commission relating to the Company's 1998 Annual Meeting of
Stockholders - Part III.
Transitional Small Business Disclosure Format
(check one):Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
THE ACTUAL RESULTS OF EIP MICROWAVE, INC. (THE "COMPANY") COULD DIFFER
MATERIALLY FROM THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED
IN "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - CERTAIN FACTORS." DUE TO SUCH FACTORS AND OTHER FACTORS,
PAST RESULTS ARE NOT A RELIABLE PREDICTOR OF FUTURE RESULTS.
GENERAL/PRODUCTS
The Company was incorporated under the laws of the State of Delaware in
1987 under the name EIP Microwave, Inc. The predecessor corporation was
organized under the laws of California in 1961, and merged with the Company in
1987.
The Company is engaged in a single industry segment constituting the
development, manufacture and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. These instruments include
microwave heterodyne-type automatic frequency counters, microwave and RF pulse
frequency counters, microwave and RF synthesized signal generators, pulse
generators, and downconverters. All of these products are electronic devices
which are used in the design, manufacture and maintenance of microwave and RF
products and systems throughout the world.
Stand-alone microwave frequency counters represented 53% of net sales in
1997, 50% of net sales in 1996, and 64% of sales in 1995. The balance of sales
in those years was mainly derived from the Company's VXIbus-based products.
VXIbus is a hardware and software standard for modular instrumentation. EIP
manufactures individual modules in the VXIbus format that provide various
functions, including frequency measurement, synthesized signal generation,
downconversion and modulation. These modules plug in to standardized racks that
supply power and computer resources.
During fiscal 1997, the Company introduced a new line of microwave
frequency counters suitable for use in laboratory, manufacturing and field
service environments. These products are portable and can be operated on their
own internal batteries. The Company began distributing these products in
October 1997, on a private label basis worldwide through an OEM relationship
with Hewlett-Packard Company ("Hewlett-Packard").
The Company designs and manufactures its own YIG (Yitrium iron garnet)
filters, which are a key feature of many EIP microwave products. Additionally,
the Company manufactures hybrid microwave integrated circuits (MICs) and
proprietary microwave subassemblies used in its microwave products. Management
believes that the Company's YIG and MIC capabilities provide its microwave
products with competitively superior performance, protection from overload, and
compact size.
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MARKETS/PRINCIPAL CUSTOMERS
The Company has a variety of customers worldwide for its microwave
products, including the military, government agencies, government
subcontractors, the telecommunications industry, the aerospace industry, and
research and development facilities. The primary customers for the Company's RF
products are telecommunication companies. The Company's principal customers,
and the percent of its net sales attributable to such customers, are
Northrop-Grumman (21% in fiscal 1997, 22% in fiscal 1996, and 11% in fiscal
1995) and Marconi (19% in fiscal 1995). Other important customers that provided
less than 10% of revenues to the Company in such periods were Hewlett-Packard
Company, Lockheed Martin, Kelly Air Force, Hughes Aircraft, and Harris
Corporation.
The Company's sales of microwave products to the United States Government
and its contractors comprised approximately 43%, 33% and 36%, of net sales for
the fiscal years 1997, 1996, and 1995, respectively. In September 1997, the
Company received a five-year indefinite quantity, fixed price supply subcontract
from a ManTech Systems Engineering Corporation, a government contractor
("ManTech"), with total sales value to the Company that could range from
approximately $3.5 to $20 million. Foreign sales represented 30% of net sales
in fiscal 1997, 36% of net sales in fiscal 1996 and 43% of net sales in fiscal
1995.
METHODS OF DISTRIBUTION
The Company has entered into a five-year OEM Agreement with Hewlett-Packard
Company ("Hewlett-Packard"). The Agreement contemplates the worldwide
distribution of the Company's recently developed line of microwave frequency
counters through Hewlett-Packard on a private label basis. The Company began
distributing this new line of products in October 1997.
The Company uses independent manufacturers' representatives for
distribution of its other products in the United States and in foreign
countries. The Company provides service and technical support to its
manufacturers' representatives, and directly to its customers.
From November 1992 until December 1995, the Company's products were
distributed in a number of foreign countries through an exclusive distribution
agreement with Marconi Instruments, a subsidiary of The General Electric
Company, Plc. of England. Foreign sales through Marconi Instruments represented
19% of net sales in fiscal 1995. The Company has since established agreements
with other independent manufacturers' representatives in these countries
previously covered by Marconi Instruments.
COMPETITION
The Company believes there are three to six competitors in the respective
markets in which it competes; however, reliable data on sales and profits of
most of the Company's competitors is not readily available because the
competitors are either privately held or are separate divisions of large
publicly held companies which do not separately report financial results for
competing divisions.
The markets in which the Company's frequency counters are sold are
well-defined and narrow markets which have become increasingly competitive both
in the United States and abroad. Within these narrow markets, the Company
believes it holds a significant competitive position, generally believed to be
number two or three in market share. The Company encounters competition,
however, from certain firms which are substantially larger and have greater
financial resources than the Company; the market leader is
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believed to be Hewlett-Packard. Other companies selling products in the same
markets as the Company include Anritsu, Advantest, Racal and XL Microwave.
The market for the microwave synthesized signal generators is considered to
be larger than the microwave frequency counter market. As the market for this
type of product is still developing, the Company has not been able to determine
market share. At present, the only other known supplier of VXIbus microwave
synthesized signal generators is Giga-tronics.
The Company's VXIbus pulse generator and downconverter are sold primarily
as companion products for integrated systems. Competitors for the pulse
generator include Wavetek and Tektronix. There is no known current direct
competition for the VXIbus downconverter.
Competition is based upon performance, reliability, product design,
availability and price and is characterized by technological change.
RESEARCH, DEVELOPMENT AND ENGINEERING
Management believes that the Company's future success is dependent to a
significant extent upon engineering and new product development. Expenditures
for research, development and engineering during the past three years have
ranged between 21% and 11% of annual net sales. Research, development and
engineering expenditures were $996,000, $978,000, and $742,000, for fiscal years
ended September 30, 1997, 1996, and 1995, respectively. Management expects that
current development efforts will result in the introduction of a new product for
the telecommunications market in 1998. All of the Company's research,
development and engineering activities have been Company-funded.
RAW MATERIALS
The principal raw materials used by the Company in its manufacturing
operations include capacitors, resistors, semiconductors, integrated circuits,
transformers, printed circuit boards, display devices, and metal and plastic
cases, most of which are purchased from outside suppliers. For the majority of
materials, the Company has access to many suppliers, and believes that it is not
dependent upon any one supplier, and that adequate alternate sources for its
materials are, for the most part, readily available. There are, however, many
applications which require specialized components currently available, in each
instance, only through a single source of supply. The loss of any of these
sources, or the inability of any such source to meet the Company's production
and quality control requirements, could be detrimental to the Company with
respect to the specific products involved.
EMPLOYEES
The Company had 45 employees at September 30, 1997, 39 of whom were full
time employees, and had 52 employees at September 30, 1996, 49 of whom were full
time employees. The Company believes that its employee relations are good, but
can make no assurances that it will continue to be able to attract and retain
qualified employees. The Company also has engaged the services of consultants
when appropriate.
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PATENTS AND TRADEMARKS
The Company holds no patents, trademarks, franchises, concessions or
royalty agreements that have a material importance to or effect on its frequency
counter, pulse counter, synthesized signal generator, pulse generator, or
downconverter product lines. However, the Company has obtained a license from a
third party for digital modulation implementations relating to products under
development by the Company.
The Company relies on trade secrets and technical know-how in order to
maintain its competitive advantage and scientific expertise. It is the practice
of the Company to enter into confidentiality agreements with employees,
consultants, and any third party to whom it discloses confidential information.
There can be no assurance that such confidential information will not be
disclosed, that similar trade secrets or expertise will not be independently
developed, or that access to such information could not be gained inadvertently.
GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS
Government approval is not required for any of the Company's principal
products.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS
The Company believes it is in compliance with applicable governmental
regulations. The Company is not aware of any probable governmental regulation
which would have a detrimental or disruptive effect on the Company.
COMPLIANCE WITH PROVISIONS ON ENVIRONMENTAL PROTECTION
The Company does not believe that compliance with federal, state, and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have any material effect upon the capital expenditures,
earnings, or competitive position of the Company.
ITEM 2. PROPERTIES
The Company leases a 20,331 square foot one story, concrete structure
located in Milpitas, California, which contains production, warehouse and office
facilities. The lease term continues until October 1998, with an option to
renew for an additional three years. The annual rent for the current term is
$226,000 plus applicable real property taxes and insurance. The Company also
leases 361 square feet of space as the Company's corporate offices located in
Newport Beach, California. The lease term continues until November 1998, with
an annual rent of $4,765. The current facilities are believed by the Company to
be suitable and adequate for its present requirements.
The Company also owns and uses machinery, equipment, and furniture with an
original cost of approximately $5,311,000 at September 30, 1997. The Company
also leases and uses equipment with capital lease obligations of $98,000 at
September 30, 1997. This personal property is believed to be in acceptable
condition.
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The Company's management believes the facilities and all machinery and
equipment of the Company are adequately insured to cover loss of equipment or
occupancy privileges.
The Company does not have any investments in real estate, real estate
mortgages or securities of persons primarily engaged in real estate activities,
and has no present policy or limitations with respect to any such future
investments.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its
subsidiary is a party or of which any of their property is the subject. The
Company is not aware of any such legal proceeding contemplated by a governmental
authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1997 no matters were submitted to a
vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 23, 1997, there are 424,907 shares of Common Stock of the
Company owned of record by approximately 244 stockholders. An additional
200,000 shares of Common Stock of the Company are reserved for issuance against
the exercise of Company stock options.
The following table reflects the high and low bid information for the
common stock of the Company for the last two fiscal years, based on quotes
provided by NASDAQ. For the period through June 25, 1997, the Common Stock was
listed on the NASDAQ SmallCap Market under the symbol EIPM. For the period
since June 25, 1997, the Common Stock has been quoted on the NASD Bulletin Board
under the symbol EIPM. These quotations reflect interdealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
Fiscal Year 1997 BID Fiscal Year 1996 BID
HIGH LOW HIGH LOW
First Quarter 5 1 First Quarter 5 1/2 1 1/2
Second Quarter 2 1 Second Quarter 7 1/4 2 3/4
Third Quarter 6 1 1/4 Third Quarter 7 1/2 2
Fourth Quarter 3 5/8 1 1/4 Fourth Quarter 6 3/4 3 1/2
No dividends were paid during the past two fiscal years. Under the terms
of agreements with the Company's senior and subordinated lenders, the Company
may not pay or declare dividends without the lenders' prior written consent.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE COMPANY'S
HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED UNDER THE HEADING "CERTAIN
FACTORS" BELOW. DUE TO SUCH RISK FACTORS AND OTHER FACTORS, PAST RESULTS ARE
NOT A RELIABLE PREDICTOR OF FUTURE RESULTS.
IN ADDITION, THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES HEREIN, AND
IS QUALIFIED ENTIRELY BY THE FOREGOING AND BY OTHER MORE DETAILED FINANCIAL
INFORMATION APPEARING ELSEWHERE.
RESULTS OF OPERATIONS
Net sales for fiscal 1997 were $4,739,000, a 27% decrease from fiscal 1996
sales of $6,492,000. The decrease in net sales in fiscal 1997, compared to the
prior year, was primarily attributable to lower export sales of frequency
counters. The 3% decrease in fiscal 1996 net sales, compared to fiscal 1995 net
sales of $6,721,000 was primarily attributable to market softness for the
Company's products. Foreign exchange rate fluctuations did not have a material
impact on net sales or gross profit margins for the last three fiscal years.
The Company's gross profit margin increased in fiscal 1997 to 38%, from 37%
in fiscal 1996. The increase in the fiscal 1997 gross profit margin, compared
to fiscal 1996 was due almost entirely to an improved gross margin for VXIbus
products. An increase in sales of higher gross margin units had a relatively
small impact. The Company's gross profit margin decreased in fiscal 1996 to 37%
from 46% in fiscal 1995. The decrease in the fiscal 1996 gross profit margin,
compared to fiscal 1995, is primarily due to a sales mix shift from higher
margin stand-alone counter products to lower margin VXIbus products and lower
than expected gross profit margin on these VXI products. Each of these factors
had a comparable impact on the decrease in gross profit margin.
Inflation did not have a material effect on revenues nor gross profit
during fiscal years 1997, 1996, or 1995.
Incoming orders for fiscal 1997 were $4,428,000, a 28% decrease from
$6,115,000 for the prior year. Backlog at September 30, 1997, was $441,000,
a 42% decrease from $763,000 at September 30, 1996. The decrease in orders
and backlog in fiscal 1997, compared to the prior year, resulted primarily
from a shortfall in domestic and international large order bookings,
particularly the lack of a large VXI order in fiscal 1997, and international
base level bookings. Each of these factors had a comparable impact on the
decrease in orders and backlog.
Incoming orders for the fiscal 1996 year were $6,115,000, a 14% decrease
from $7,127,000 in fiscal 1995 orders. Backlog at September 30, 1996 was
$763,000, a 37% decrease from $1,210,000 at September 30, 1995. The decrease in
orders and backlog in fiscal 1996, compared to the prior year, was primarily due
to a 36% decrease in large government-related orders.
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Research, development and engineering expenditures increased 2% to $996,000
in fiscal 1997, from $978,000 in the prior fiscal year. Research, development
and engineering expenditures in fiscal 1996 increased 32%, to $978,000 compared
to $742,000 in fiscal year 1995. The increases in both years were due to
increased new product development expenditures, primarily to support the
development of a new frequency measurement product introduced in fiscal 1997.
Selling, general and administrative expenses decreased 4% in fiscal 1997 to
$2,005,000, compared to $2,084,000 in fiscal 1996. The decrease in selling,
general and administrative expenses was due almost entirely to decreased
commission expense resulting from decreased sales volume. Overall expense
control had a small impact. Selling, general and administrative expenses
decreased 9% in fiscal 1996 to $2,084,000, compared to $2,289,000 in fiscal
1995, primarily due to the decrease in commission expense resulting from lower
sales volume (approximately 60% of the change), and a decrease in advertising
expenses (approximately 20% of the change).
During fiscal 1997, accrued and unpaid Board of Directors' fees amounted to
$54,000. In 1996, the Board of Directors waived fees owed to them by the
Company totaling $112,000. In fiscal 1996, the reversal of previously accrued
fees was included in "Interest and other, net" cost and expenses in the
statement of operations, and thereby reduced the net loss for the year ended
September 30, 1996.
The Company earned interest and dividend income of $6,000, $26,000, and
$25,000, during fiscal 1997, 1996, and 1995, respectively. The decrease in
interest and dividend income earned in fiscal 1997, as compared to fiscal 1996
and 1995, was primarily due to lower cash balances in fiscal 1997. Also
included in interest and other for fiscal 1997, 1996 and fiscal 1995, are gains
on sales of fixed assets of $1,000, $14,000 and $56,000, respectively.
The Company recorded a net loss of $1,290,000 in fiscal 1997, as compared
to a net loss of $493,000 recorded for the prior year. Gains on sale of capital
equipment of $1,000 reduced the net loss for fiscal 1997. Further, the net loss
for fiscal 1996 reflects a credit of $111,000 due to the waiver of fees owed by
the Company to members of the Board of Directors, and a gain on sale of capital
equipment of $14,000. The increase in losses for fiscal 1997, compared to the
prior year, is primarily due to decreased sales.
As a result of the foregoing, the Company incurred a loss of $1,290,000 in
fiscal 1997, as compared to a loss of $493,000 recorded in fiscal 1996, and
earnings of $125,000 in fiscal 1995.
The Company believes that it will incur costs of addressing Year 2000
issues in amounts of approximately $150,000 in fiscal 1998 and $50,000 in fiscal
1999, for hardware, software, installation, and related training, for a new
business management and accounting system.
FINANCIAL CONDITION
At September 30, 1997, the Company's cash, cash equivalents and
short-term investment balance was $280,000, as compared to $540,000, at
September 30, 1996. The Company's accounts payable balance was $401,000 at
September 30, 1997, compared to $706,000 at September 30, 1996. At September
30, 1997, the Company had no material commitments for capital expenditures.
Working capital decreased by $681,000 in fiscal 1997, compared to a
decrease of $724,000 in fiscal 1996. The Company's current ratio decreased to
1.01:1 at September 30, 1997, from 1.42:1 at September 30, 1996.
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At September 30, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $295,500 under its bank line of credit (the "Bank
Line"). The Bank Line provides for borrowings up to 60% of eligible accounts
receivable, not to exceed $500,000. At September 30, 1997, interest was charged
at the bank's prime rate plus 3% per annum, provided that the interest rate in
effect each month shall not be less than 10% per annum, and is payable monthly
(11.5% as of September 30, 1997). At September 30, 1997, the Bank Line was set
to expire on March 4, 1998 and contained various restrictive covenants
requiring, among other matters, the maintenance of minimum levels of tangible
net worth and certain financial ratios, including a minimum quick ratio and a
maximum debt to net worth ratio, and the achievement of profitability. The Bank
Line also precludes or limits the Company's ability to take certain actions,
such as paying dividends, making loans, making acquisitions or incurring
indebtedness, without the bank's prior written consent. The Bank Line is
secured by substantially all of the Company's assets.
At September 30, 1997, the Company was in default of certain financial
covenants under the Bank Line. The Bank Line permits losses for the quarter
ended June 30, 1997 in an amount up to $165,000 (and the Company's losses for
such fiscal quarter were $278,000), permits losses for the quarter ended
September 30, 1997 in an amount up to $110,000 (and the Company's losses for
such fiscal quarter were $492,000) and requires a tangible net worth, including
loans from affiliates, of at least $975,000 (and the Company's tangible net
worth, including loans from affiliates, at September 30, 1997, was $937,000).
These covenant defaults have been waived by the bank.
At December 12, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under the Bank Line, as amended.
Interest is charged at the bank's prime rate plus 5% per annum (13.5% as of
December 12, 1997), and is payable monthly. The Bank Line expires on January
31, 1998. The Bank Line contains various restrictive covenants requiring,
among other matters, the maintenance of minimum levels of tangible net worth
and certain financial ratios, including a minimum quick ratio and a maximum
debt to net worth ratio, and maximum losses. The Bank Line also precludes or
limits the Company's ability to take certain actions, such as paying
dividends, making loans, making acquisitions or incurring indebtedness,
without the bank's prior written consent. The Bank Line is secured by
substantially all of the Company's assets, and is guaranteed by the Bishops
and the Bishop Family Trust. At December 12, 1997, the Company was in
compliance with the restrictive covenants of the Bank Line.
The Company is continuing to pursue discussions with other lenders
concerning a working capital facility; however, there can be no assurance that
the Company will be able to obtain a satisfactory working capital facility.
Even if the Company is able to obtain a working capital facility from another
lender, there can be no assurance as to the terms of such facility; and the
terms of such facility could be even less attractive to the Company than the
terms of the existing Bank Line or the non-binding proposal from SVB. If the
Company is unable to obtain a satisfactory working capital facility, the Company
and its business could be materially adversely affected.
At September 30, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $600,000 under Subordinated Loan Agreement dated
as of December 16, 1996 with J. Bradford Bishop, Chairman and Chief Executive
Officer of the Company, and John F. Bishop, Vice Chairman, Treasurer and
Secretary of the Company (together, the "Bishops"). The Bishops advanced
$600,000 to the Company under the Subordinated Loan Agreement. Interest accrued
thereon at 8% per annum, payable quarterly. In connection with the Subordinated
Loan Agreement, the Company issued warrants to the Bishops to purchase 90,000
shares of Common Stock at $3.00 per share. The Subordinated Loan Agreement
terminated on October 15, 1997, and all obligations thereunder were repaid in
full on such date with the proceeds from the Loan Facility with the Bishop
Family Trust. As consideration for the early repayment of such obligations, the
warrants issued to the Bishops were canceled on October 15, 1997.
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At September 30, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $400,000 under several bridge loans from the
Bishops payable on demand (the "Bridge Loans"). Interest accrued thereon at 10%
per annum. The Bridge Loans were repaid in full on such date with the proceeds
from the Loan Facility with the Bishop Family Trust (described below).
On October 15, 1997, the Company entered into a loan and security agreement
(the "Loan Facility") with John F. Bishop and Ann R. Bishop, trustees of the
Bishop Family Trust (the "Bishop Family Trust"). At December 12, 1997, the
Company had outstanding borrowings in the aggregate principal amount of
$1,350,000. The Loan Facility provides for a term loan of $1,000,000 and
revolving advances up to $450,000. Interest is charged at the prime rate plus
5% per annum and is payable monthly. The Loan Facility expires on October 15,
1998. The Loan Facility contains various restrictive covenants requiring, among
other matters, the achievement of profitability on a rolling 3-month basis
commencing in August 1998, and the maintenance of minimum revenues from its OEM
relationship with Hewlett-Packard Company commencing in January 1998. The Loan
Facility also precludes or limits the Company's ability to take certain actions,
such as paying dividends, making loans, making acquisitions or incurring
indebtedness, without the Bishop Family Trust's prior written consent. The Loan
Facility is secured by substantially all of the Company's assets. The Bishop
Family Trust has subordinated the Loan Facility to the Bank Line. At December
12, 1997, the Company was in compliance with the restrictive covenants of the
Loan Facility.
Under the terms of the Loan Facility, the Company will be obligated to pay
facility fees of up to $282,000 to the Bishop Family Trust in the manner
described below.
A. A facility fee of $70,500 was fully earned on October 22, 1997 and
will be payable by the Company on January 22, 1998.
B. If the principal amount of the obligations outstanding under the Loan
Facility on January 22, 1998 exceeds $1,000,000, then an additional facility fee
of $70,500 will be fully earned on such date and will be payable by the Company
on January 22, 1998.
C. If the principal amount of the obligations outstanding under the Loan
Facility on April 22, 1998 exceeds $1,000,000, then an additional facility fee
of $141,000 will be fully earned on such date and will be payable by the Company
on April 22, 1998.
The Company will have the right to pay the facility fee in cash or by issuance
of Common Stock. The number of shares of Common Stock issuable as payment for a
facility fee will equal (a) the applicable facility fee divided by (b) the Fair
Market Value (as defined in the Loan Facility) per share of Common Stock on the
date such facility fee is payable to the Bishop Family Trust.
Future performance could reduce the total amount of funds available under
the Bank Line and the Loan Facility at any given time.
On November 14, 1997, the Company began a rights offering (the "Rights
Offering"), whereby the Company offered 1,699,628 shares (the "Shares") of its
Common Stock at $1.70 per Share to its stockholders of record on November 7,
1997 (the "Record Date"). Each stockholder of record was entitled to purchase
four Shares for each share of Common Stock of the Company which they owned on
the Record Date (the "Basic Subscription Rights"). Each shareholder of record
also had the opportunity to subscribe for as many additional shares as they
desired. However, if the Shares were oversubscribed, the Shares would be
allocated pro rata based on the number of Shares subscribed to under the Basic
Subscription Rights. The
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Rights Offering was initially set to expire on December 15, 1997, unless
extended by the Company. The Company has extended the expiration date for the
Rights Offering until January 5, 1998 at 5:00 P.M., California time, unless
further extended. The Company has also increased the number of shares offered
to 5,948,698, and has lowered the price for each Share to $1.00. The net
proceeds to the Company upon successful completion of the Rights Offering will
be used to develop new products, fund working capital requirements and repay
debt.
In addition to cash on hand and funds generated from operations the Company
believes that borrowings under existing or replacement debt facilities and
proceeds from the Rights Offering in an aggregate amount equal to approximately
$3,500,000 will be necessary to satisfy the Company's cash requirements for
implementing its business plan during the remainder of the fiscal year ending
September 30, 1998. The actual cash resources required will depend upon
numerous factors, including those described under "Certain Factors--Dependence
on New OEM Relationship," "--Dependence on Government Contractors, " and "
- --Uncertainty of Product Development and Introduction", and the cash
requirements could be materially greater than $3,500,000. There is no assurance
that the Company will be successful in obtaining all such capital from the
Rights Offering or from such debt facilities. If the Company is unable to
obtain such capital from the Rights Offering or from such debt facilities on a
timely basis, the Company will be required to significantly curtail its planned
operations and its business, financial condition and results of operations could
be materially adversely affected.
CERTAIN FACTORS
IN ADDITION TO THE FACTORS DISCUSSED ELSEWHERE IN THIS 1997 ANNUAL REPORT
AND FORM 10-KSB, THE FOLLOWING ARE IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL
RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD-LOOKING STATEMENT MADE BY OR ON BEHALF OF THE COMPANY.
REPAYMENT OF EXISTING DEBT
At December 12, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under its $500,000 bank line of credit
(the "Bank Line") with Silicon Valley Bank ("SVB"), which expires January 31,
1998. All such borrowings are payable in full upon expiration. See "Financial
Condition." In addition to the Bank Line, the Company has a $1,450,000 term and
revolving advance loan facility with the Bishop Family Trust which expires in
October 1998. At December 12, 1997, the Company had outstanding borrowings in
the aggregate principal amount of $1,350,000 under the Bishop Family Trust Loan
Facility. All such loans are payable in full upon expiration. See "Financial
Condition". There can be no assurance that the Company will be able to extend,
repay or refinance its loans under the Bank Line or the Bishop Family Trust Loan
Facility. The Company is continuing to pursue discussions with other lenders
concerning a replacement working capital facility; however, there can be no
assurance that the Company will be able to obtain a satisfactory working capital
facility. Even if the Company is able to obtain a working capital facility from
another lender, there can be no assurance as to the terms of such facility; and
the terms of such facility could be even less attractive to the Company than the
terms of the existing Bank Line. If the Company is unable to obtain a
satisfactory working capital facility, the Company and its business could be
materially adversely affected. Further, such loans are subject to various
covenants relating to the Company's performance and financial condition. If the
Company does not maintain compliance with such covenants, the lenders have the
right to declare all outstanding amounts immediately due and payable. There can
be no assurance that the Company will be able to maintain compliance with the
covenants under the Bank Line or the Bishop Family Trust Loan Facility.
12
<PAGE>
DEPENDENCE ON NEW OEM RELATIONSHIP
The Company recently introduced a new line of microwave frequency counters
which it began distributing in October 1997, on a private label basis worldwide
through an OEM relationship with Hewlett-Packard Company ("Hewlett-Packard").
The Company expects that this OEM relationship will account for more than 15% of
its revenues in fiscal year 1998. However, Hewlett-Packard is not obligated to
purchase a minimum quantity of products, and the failure of Hewlett-Packard to
purchase the product quantity expected by the Company would have a material,
negative impact upon the Company's business and prospects of profits. There can
be no assurance that the Company will be able to maintain a successful
relationship with Hewlett-Packard and generate revenues or profits from the
relationship.
DEPENDENCE ON GOVERNMENT CONTRACTORS
Approximately 37% of the Company's revenues in the last two fiscal years
have been derived from the sale of products to government contractors. The
Company recently received a five-year indefinite quantity, fixed price supply
subcontract from ManTech Systems Engineering Corporation, a government
contractor ("ManTech"), for the supply of RF synthesized signal generators and
RF down converters, with total sales value to the Company that could range from
approximately $3.5 to $20 million. The Company has received an initial purchase
order under the subcontract in the amount of $227,000. Further production
purchase order releases under the subcontract are subject to satisfactory
completion of field testing of the U.S. Marine Corps' Third Echelon Test Set
(TETS) systems and the Company's components. The Company will incur substantial
expenses in preparing to satisfy its obligations under this subcontract.
However, despite the incurrence of such expenses, this and other subcontracts
with government contractors are subject to cancellation provisions in favor of
the government contractor. The subcontract with ManTech is subject to
termination by ManTech in the event the government terminates its contract with
ManTech. Further, this subcontract can be terminated if the Company's
components do not satisfy field testing requirements or the Company otherwise
defaults under the subcontract. There can be no assurance that such
subcontracts will not be canceled. Further, there can be no assurance that the
Company will receive additional subcontracts from government contractors.
DEPENDENCE ON KEY SUPPLIERS
A number of the Company's products require specialized components currently
available only through single sources of supply. The loss of any of these
sources, or the inability of any such source to meet the Company's production
and quality control requirements, could be detrimental to the Company with
respect to the specific products involved. If any of the Company's single
source suppliers is not able to deliver these specialized components, the
Company would be required to implement alternative supply strategies (such as
changing to one or more other suppliers, which could require product design or
specification changes and would likely cause delays in shipment of the Company's
products) or discontinue sales of the affected products.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND INTRODUCTION
The Company's success depends to a large degree on its ability to develop
and introduce in a timely manner new or updated products which are affordable,
functional in purpose, distinctive in quality and design and tailored to the
purchasing patterns of the Company's customers and potential customers.
Misjudgments as to customer interest in new or updated products could lead to
excess inventories and markdowns and could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that new products under development will be successfully developed
13
<PAGE>
and introduced. Further, due to the uncertainty associated with any product
development and introduction (such as delays in development and lack of market
acceptance of a new product), there can be no assurances that the Company's
development and introduction efforts will be successful. If products under
development are not successfully introduced, the Company's business, financial
condition and results of operations would be materially adversely effected.
COMPETITION
The markets in which the Company's products are sold have become
increasingly competitive. Most of the Company's principal competitors have
substantially greater financial resources. The Company's results of operations
can be significantly affected by pricing pressures arising from customer demand
and pricing strategies by the Company's competitors, and the timing and market
acceptance of new product introductions by competitors of the Company. There
can be no assurance that pricing pressures will not have a material adverse
effect on the Company, or that the Company's competitors will not succeed in
developing products that would render the Company's technology and products
obsolete and noncompetitive.
Due to the foregoing and other factors, past results are not a reliable
predictor of future results. In addition, the securities of many technology and
developmental companies, such as the Company, have historically been subject to
extensive price and volume fluctuations that may adversely affect the market
price of their common stock.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements, together with
the notes thereto and the report thereon of Meredith, Cardozo, Lanz & Chiu LLP
appearing on the pages of this report set forth below:
PAGE(S)
Consolidated Balance Sheets as of September 30, 1997 and 1996 15
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995 16
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended September 30, 1997, 1996 and 1995 16
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995 17
Notes to Consolidated Financial Statements 18-27
Report of Independent Auditors 28
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) September 30, September 30,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 250 $ 216
Short-term investments 30 324
----------------------
280 540
Accounts receivable, net 405 686
Inventories 1,023 1,067
Prepaid expenses 62 59
----------------------
Total current assets 1,770 2,352
Property and equipment, net 590 631
----------------------
$2,360 $2,983
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 401 $ 706
Accrued liabilities 629 546
Advanced payments from customers - 190
Bank borrowings 296 185
Notes payable to affiliates 400 -
Current portion of obligations under capital
leases 34 34
----------------------
Total current liabilities 1,760 1,661
----------------------
Long term notes payable to affiliates 600 -
Long term obligations under capital leases 63 95
----------------------
Total liabilities 2,423 1,756
----------------------
Commitments and contingencies (Note 5)
Stockholders' equity (deficiency):
Common stock, $.01 par value;
authorized -10,000,000 shares;
424,907 issued and outstanding 5 5
Additional paid-in capital 848 848
Retained earnings (accumulated deficit) (916) 374
----------------------
Total stockholders' equity (deficiency) (63) 1,227
----------------------
$2,360 $2,983
----------------------
----------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended September 30, 1997 1996 1995
(In thousands except per share data)
<S> <C> <C> <C>
Net sales $ 4,739 $ 6,492 $ 6,721
-------------------------------------
Cost and expenses:
Cost of sales 2,955 4,064 3,646
Research, development and engineering 996 978 742
Selling, general and administrative 2,005 2,084 2,289
Interest and other, net 73 (141) (81)
-------------------------------------
Total costs and expenses 6,029 6,985 6,596
-------------------------------------
Net income (loss) before income tax (1,290) (493) 125
Income tax provision - - -
-------------------------------------
Net income (loss) $(1,290) $(493) $125
-------------------------------------
-------------------------------------
Net income (loss) per share $(3.04) $(1.16) $0.30
-------------------------------------
-------------------------------------
Weighted average common shares outstanding 425 423 423
-------------------------------------
-------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-in (Accumulated
(Dollars in thousands) Shares Amount Capital Deficit) Total
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 423,307 $ 5 $844 $ 742 $1,591
Net income - - - 125 125
--------------------------------------------------------------------
Balance at September 30, 1995 423,307 5 844 867 1,716
Stock issues 1,600 - 4 - 4
Net income - - - (493) (493)
--------------------------------------------------------------------
Balance at September 30, 1996 424,907 5 848 374 1,227
Net income - - - (1,290) (1,290)
--------------------------------------------------------------------
Balance at September 30, 1997 424,907 $ 5 $848 $(916) $(63)
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash
<TABLE>
For the years ended September 30, 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,290) $(493) $ 125
Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating activities:
Depreciation and amortization 167 147 220
(Gain) loss on the sale of capital equipment (118) (50) (146)
Change in assets and liabilities:
Accounts receivable, net 281 378 (350)
Inventories 44 66 (149)
Prepaid expenses and other assets (3) 45 (36)
Accounts payable (305) 96 83
Accrued liabilities 83 (130) 65
Advanced payments from customers (190) 190 -
-------------------------------------
Cash provided by (used in) operating activities (1,331) 249 (188)
-------------------------------------
Cash flows from investing activities:
Purchase of short-term investments - (213) (11)
Sale of short-term investments 294 208 -
Capital expenditures (168) (394) (41)
Proceeds from the sale of capital equipment 160 61 155
-------------------------------------
Cash (used in) provided by investing activities 286 (338) 103
-------------------------------------
Cash flows from financing activities:
Proceeds from bank borrowings 111 185 -
Proceeds from notes payable to affiliates 1,000 - -
Proceeds from sales of common stock to employees - 4 -
Repayment of obligations under capital leases (32) (10) -
-------------------------------------
Cash provided by financing activities 1,079 179 -
-------------------------------------
Increase (decrease) in cash and equivalents 34 90 (85)
Cash and equivalents at beginning of period 216 126 211
-------------------------------------
Cash and equivalents at end of period $ 250 $ 216 $ 126
-------------------------------------
-------------------------------------
Supplemental information:
Interest paid $ 31 $ 13 $ 1
Equipment acquired pursuant to capital leases - $ 124 -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
NOTE 1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company is engaged in a single industry segment constituting the
development, manufacture, and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. The Company's standalone
microwave frequency counters represented 53% of net sales in 1997, 50% of net
sales in 1996, and 64% of net sales in 1995. Substantially all of its
activities are conducted in the United States, and the Company has no foreign
manufacturing operations nor material amounts of foreign assets. Export sales,
principally to customers in Western Europe and Pacific Rim countries, as a
percent of net sales were approximately 30% in 1997, 36% in 1996, and 43% in
1995. Profit margins are similar on foreign and domestic sales. Direct sales
to the United States government and its contractors as a percent of net sales
were approximately 43% in 1997 (20% to one government subcontractor), 33% in
1996 (22% to one government subcontractor), and 36% in 1995 (11% to one
government subcontractor).
LIQUIDITY
As shown in the accompanying consolidated financial statements, the Company
incurred a loss from operations for the year ended September 30, 1997 of
$1,290,000 and has experienced significant fluctuations in operating results in
the past. The fiscal 1998 operating plan includes the release of a new
frequency measurement product and other new products. To the extent that
product development is delayed or the new product introductions do not achieve
sufficient market acceptance, the Company's financial position and results of
operations will be adversely impacted. The Company's fiscal 1998 operating plan
also assumes additional financing will be necessary to fund its 1998 operations
(see notes 6 and 7).
The Company has incurred significant recent losses from operations and
additional financing will be required for the Company to meet its business plan
for fiscal 1998 and beyond. There can be no assurance that the Company will not
incur additional losses until its recently introduced and existing products
generate significant revenues. The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going
concern. The Company's business plan for fiscal 1998 involves three key
operating objectives: (1) increasing the manufacture and shipment of microwave
frequency counters to Hewlett-Packard Company for distribution on a private
label basis worldwide through an OEM relationship; (2) completing field testing
of the Company's RF synthesized signal generators and RF down converters under
its five-year indefinite quantity, fixed price subcontract with ManTech Systems
Engineering Corporation, and preparing for shipment of production quantities of
these products in the fourth fiscal quarter of 1998; and (3) completing current
development efforts and introducing new test instrumentation for the wireless
telecommunications market. Management believes that it can successfully
implement these key operating objectives. The Company's ability to generate
sufficient cash to support its business plan during the 1998 fiscal year depends
on the ability of management to obtain additional debt and equity financing,
through the Rights Offering and other capital sources. Management is currently
pursuing additional debt financing. If the Company is unable to obtain such
financing, it will be required to reduce discretionary spending in order to
maintain its operations at a reduced level. Management believes that it will be
able to reduce discretionary spending if required. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
18
<PAGE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions and
accounts have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, consisting of publicly traded preferred stocks and
government bonds, are stated at fair value. The Company has adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires companies to
classify investments in debt and equity securities with readily determinable
fair values as "held-to-maturity", "available for sale", or "trading" and
establishes accounting and reporting requirements for each classification. The
Company classifies all securities held as available for sale. Securities
classified as available for sale are reported at their fair market value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Such unrealized gains and losses were immaterial as of September 30,
1997 and 1996. The Company's government bonds have a maturity of one year or
less. Publicly traded preferred stocks are considered highly liquid and are
classified as short-term investments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments in a variety of financial
instruments such as certificates of deposit and marketable equity securities.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company maintains an allowance for uncollectible accounts receivable based upon
the expected collectibility of all accounts receivable balances. At September
30, 1997, the accounts receivable balances from three customers represented 14%,
12%, and 8% of net trade receivables.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost (determined on a first-in, first-out basis), or market.
PROPERTY AND EQUIPMENT
Purchased property and equipment are stated at cost and are depreciated
using the straight-line method over lives ranging from three to eight years.
Self-constructed demonstrator products are stated at their standard
manufacturing cost.
19
<PAGE>
REVENUE RECOGNITION AND WARRANTY
Sales are recognized at the time of shipment provided no significant
obligations remain and collectibility is probable. The Company provides for the
estimated costs of fulfilling its warranty obligation at the time the related
sale is recorded.
INCOME TAXES
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns.
NET INCOME (LOSS) PER SHARE
The calculation of net income (loss) per share is based upon the weighted
average number of common and common equivalent shares outstanding during the
year. As a result of the losses incurred in fiscal 1997 and 1996, the common
equivalent shares were antidilutive and, accordingly, were excluded from the
computation of loss per share for those years. Common stock equivalents were
not materially dilutive for the year ended September 30, 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Only the disclosure requirements of this standard were adopted
by EIP for the year ending September 30, 1997, and therefore there was no impact
on EIP's consolidated financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 which is effective for the Company's fiscal year ending September 30,
1998, redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share, and fully diluted earnings per share is replaced by
diluted earnings per share. The adoption of SFAS 128 is not expected to have a
material impact on the Company since earnings per share reported under
Accounting Principles Board Opinion No. 15 approximates diluted earnings per
share, which will be reported under SFAS 128.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 129 ("SFAS 129"), "Disclosure of Information about
Capital Structure". SFAS 129 requires disclosure of certain information related
to the Company's capital structure and is not anticipated to have a material
impact on the Company's financial position or results of operations.
20
<PAGE>
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income as defined includes all
changes in equity (net assets) during a period from nonowner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. The disclosure prescribed by SFAS
must be made beginning with the first quarter of 1998.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS 131 are effective in 1998.
NOTE 2. CONSOLIDATED BALANCE SHEET DETAIL
(Dollars in thousands) September 30,
1997 1996
Accounts receivable:
Trade $ 455 $ 736
Less - allowance for doubtful accounts (50) (50)
--------- ---------
$ 405 $ 686
--------- ---------
--------- ---------
Inventories:
Raw materials $ 531 $ 719
Work-in-process 452 320
Finished goods 40 28
--------- ---------
$ 1,023 $ 1,067
--------- ---------
--------- ---------
Property plant and equipment:
Machinery and equipment $ 3,093 $ 3,121
Computer equipment and software 1,047 1,054
Demonstrator equipment 306 337
Furniture, fixtures and other fixed assets 865 807
--------- ---------
5,311 5,319
Less: accumulated depreciation (4,721) (4,688)
--------- ---------
$ 590 $ 631
--------- ---------
--------- ---------
Accrued liabilities:
Salaries, wages and benefits $ 297 $ 215
Board of Directors fees and expenses 116 77
Legal and accounting 89 14
Accrued interest - affiliates 49 -
Commissions 25 83
Warranty 21 53
Other 32 104
--------- ---------
$ 629 $ 546
--------- ---------
--------- ---------
21
<PAGE>
NOTE 3. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company has a Retirement/Savings Plan which qualifies as a thrift plan
under Section 401(k) of the Internal Revenue Code. All employees who have
completed three months of service on or before the semiannual entry period are
eligible to participate in the Retirement Plan. The Retirement Plan allows
participants to contribute up to 12% of their earnings to the Retirement Plan
and deduct this amount from their wages for federal income tax purposes. The
Company will contribute 50 cents for each dollar contributed by the employee up
to 3% of total wages. Company contributions in fiscal years 1997, 1996, and
1995, totaled $39,000, $49,000, and $38,000, respectively.
INCENTIVE COMPENSATION
The Company has an incentive compensation plan which provides for awards of
bonuses to officers and key employees based principally on achieving stipulated
Company financial objectives. In making specific awards, consideration is given
to the individual's contribution to the success of the Company, to the success
and performance of the unit or department of which the individual is a member,
and to the achievement of individual performance goals established at the
beginning of the fiscal year. The formula for computing bonuses has been
subject to annual modification and may in the future be again modified at the
discretion of the Board of Directors. No bonuses were awarded for fiscal years
1997 and 1996. Bonuses of $61,000 were awarded for fiscal 1995 results.
STOCK APPRECIATION RIGHTS PLAN
On November 11, 1992, the Board of Directors adopted a Stock Appreciation
Rights Plan ("SAR Plan"). The SAR Plan provides for the award of appreciation
rights ("SARs") to officers and key management employees of the Company
entitling such participants to receive the increase, if any, in the value of one
share of Company common stock from the date of the award to the date(s) of
valuation established at the time of the award. Generally, SARs are deemed
vested in five equal annual installments. Each award vested will be paid in
cash on a scheduled payment date. During fiscal 1997, 1996, and 1995, no SARs
were awarded. A total of 760, 2,760, and 2,760 SARs were vested during fiscal
1997, 1996, and 1995, respectively. A total of 4000, and 960 SARs were canceled
during fiscal 1997 and 1995, respectively, leaving an aggregate of 760 SARs
outstanding at September 30, 1997. The Company accrues a compensation liability
over the vesting period based on the increase in the market value of the common
stock over the award price. The liability recorded in fiscal 1997, 1996 and
1995 was $2,000, $8,000 and $20,000, respectively.
STOCK OPTION PLAN
FASB Statement 123, "Accounting for Stock-Based Compensation", requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of stock options at the
grant date by using the Black-Scholes option pricing-model with the following
weighted average assumptions used for grants in 1996, 1995, and 1994,
respectively: dividend yield of 0; expected volatility of 211%, 198%, and 139%;
risk-free interest rates of 5.79%, 5.73%, and 5.72%; and expected lives of four
years for the plan options.
22
<PAGE>
Under the accounting provisions of FASB Statement 123, the Company's net
(loss) income and (loss) earnings per share would have been increased/reduced to
the pro forma amounts indicated below. Pro forma results for 1997 may not be
indicative of pro forma results in future periods because the pro forma amounts
do not include pro forma compensation cost for options granted prior to October
1, 1996.
September 30,
---------------------------------------
1997 1996 1995
------------ ---------- ---------
Net (loss) income:
As reported $ (1,290,000) $ (493,000) $ 125,000
------------ ---------- ---------
------------ ---------- ---------
Pro forma $ (1,311,000) $ (493,000) $ 125,000
------------ ---------- ---------
------------ ---------- ---------
Primary (loss) earnings per share:
As reported $ (3.04) $ (1.16) $ 0.30
------------ ---------- ---------
------------ ---------- ---------
Pro forma $ (3.08) $ (1.16) $ 0.30
------------ ---------- ---------
------------ ---------- ---------
A summary of the status of the Company's stock option plan as of September 30,
1997, 1996, and 1995, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------------
September 30, 1997 September 30, 1996 September 30, 1995
--------------------------- --------------------------- ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- --------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 95,400 $ 3.039 59,500 $ 2.375 -- $ --
Granted 50,000 4.750 37,500 4.030 59,500 2.375
Exercised -- -- (1,600) 2.375 -- --
Cancelled (13,000) 2.721 -- -- -- --
-------- --------- -------- --------- --------- ---------
Outstanding at
end of year 132,400 $ 3.727 95,400 $ 3.039 59,500 $ 2.375
-------- --------- -------- --------- --------- ---------
-------- --------- -------- --------- --------- ---------
Options exercisable
at year-end 49,765 24,299 --
--------- --------- ---------
--------- --------- ---------
Weighted-average
fair value of
options granted
during the year $ 4.750 $ 4.030 $ 2.375
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
--------------- ----------- ------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.375 47,900 7.5 Years $ 2.375 29,532 $ 2.375
$3.875 19,500 8.3 Years $ 3.875 11,900 $ 3.875
$4.263 15,000 8.3 Years $ 4.263 5,000 $ 4.263
$4.750 50,000 9.1 Years $ 4.750 3,333 $ 4.750
-------- --------- ------- --------
132,400 $ 3.707 49,765 $ 3.082
-------- --------- ------- --------
-------- --------- ------- --------
</TABLE>
23
<PAGE>
NOTE 4. INCOME TAXES
Deferred tax assets (liabilities) are summarized as follows:
(Dollars in thousands) 1997 1996 1995
Net operating loss carryforwards $ 1,613 $ 1,104 $ 1,016
Tax credit carryforwards 124 106 106
Inventory and other valuation reserves 229 221 190
-----------------------------
Gross deferred tax asset 1,966 1,431 1,312
-----------------------------
Gross deferred tax liability - - -
-----------------------------
Deferred tax asset valuation allowance (1,966) (1,431) (1,312)
-----------------------------
Net deferred tax asset $ - $ - $ -
-----------------------------
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not that some portion or all of the deferred tax asset will
not be realized.
The U.S. net operating loss carryforward of approximately $4,400,000 at
September 30, 1997, expires by fiscal year 2011 if not offset against taxable
income. The amount of and the benefit from net operating losses that can be
carried forward may be impaired in certain circumstances. Events which may
cause changes in the Company's tax carryovers include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company has signed a lease for 20,331 square feet in a building located
in Milpitas, California, for an initial term of three years ending October 31,
1998. The lease provides for rentals of $226,000 and $19,000 for fiscal years
1998 and 1999 plus applicable real property taxes and insurance, and contains
one three year renewal option. Future lease commitments for the next five
fiscal years for all other leases as of September 30, 1997 were as follows (in
thousands):
Fiscal year ending September 30, Capital Leases Operating Leases
-------------------------------- -------------- ----------------
1998 $ 40 $ 33
1999 28 24
2000 26 22
Thereafter 21 19
------- ------
Total minimum lease payments 115 $ 98
Less amount representing interest (18) ------
------- ------
Present value of minimum lease payments 97
Less current portion (34)
-------
Long-term lease obligation $ 63
-------
-------
24
<PAGE>
The Company also leases certain equipment on a month-to-month basis. Total
rental expense under all operating leases was $254,000, $258,000, and $300,000,
in fiscal years 1997, 1996, and 1995, respectively.
On October 1, 1995, the Company entered into an Employment Agreement (the
"Agreement") with John F. Bishop, Vice-Chairman of the Board, Treasurer, and
Secretary of the Company, whereby Mr. Bishop will provide his services for a
monthly salary of $6,500 for an initial term of two years. On the first day of
each month, the initial term is automatically extended for an additional month,
unless either party notifies the other in writing of his or its desire not to
extend the term. In the event the Company elects not to extend the term or
there is a change in control of the Company (the date of such event is referred
to as the "Transition Date"), Mr. Bishop will continue to perform services for
the Company for a three month transition period and the Company would maintain
his compensation and other benefits for the three month transition period and an
additional twenty-one months. Effective January 1, 1997, Mr. Bishop has agreed
to reduce his monthly salary to $3,250 until the Transition Date. The Agreement
also allows Mr. Bishop the use of an automobile and the right to receive title
to the automobile, arising out of his agreement to forgo $56,846 of salary in
prior years. Maintenance, insurance and gasoline costs for the automobile and
an office location are also part of the Agreement. The corporate office is
currently located in Newport Beach, California, leased at a monthly rate of
$1,320 on a month-to-month basis.
NOTE 6. BANK BORROWINGS
At September 30, 1996, the Company had a bank line of credit ("line") which
provided for borrowings up to $500,000, not to exceed 60% of eligible accounts
receivable. The balance outstanding was $185,000 as of September 30, 1996. The
line bears interest at the bank's prime rate plus 3% per annum, provided that
the interest rate in effect each month shall not be less than 10% per annum, and
is payable monthly (11.25% as of September 30, 1996). The line contains various
restrictive covenants requiring, among other matters, the maintenance of minimum
levels of tangible net worth and profitability and certain financial ratios,
including minimum quick ratio and maximum debt to net worth ratio. The line
also precludes or limits the Company in taking certain actions, such as paying
dividends, making loans, making acquisitions or incurring indebtedness, without
the bank's prior written consent. The line is secured by substantially all of
the Company's assets. As of November 15, 1996, the bank extended the maturity
date of the line to January 15, 1997 and amended certain restrictive covenants,
but limited borrowings to the $185,000 outstanding.
On January 15, 1997, the bank line was revised to provide for borrowings up
to $500,000. At September 30, 1997, the outstanding borrowings were $296,000.
As of October 23, 1997, the Company was not in compliance with the restrictive
covenants of the line, as so amended. In the event that the Company is unable
to maintain compliance with financial covenants, J. Bradford Bishop, the
Chairman and Chief Executive Officer of the Company, and John F. Bishop, the
Vice Chairman, Treasurer and Secretary of the Company (the "Bishops") have
agreed to finance up to $500,000 of working capital (in addition to funds
provided under the subordinated loan facility (note 7)) on terms acceptable to
the Bishops and the Company to replace the line of credit.
25
<PAGE>
NOTE 7. SUBORDINATED LOAN AGREEMENT AND BRIDGE LOANS
The Company entered into Subordinated Loan Agreement dated as of December
16, 1996 with J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Treasurer and Secretary of the
Company (together, the "Bishops"). The Bishops advanced $600,000 to the Company
under the Subordinated Loan Agreement. Interest accrued thereon at 8% per
annum, payable quarterly. In connection with the Subordinated Loan Agreement,
the Company issued warrants to the Bishops to purchase 90,000 shares of Common
Stock at $3.00 per share. The Subordinated Loan Agreement terminated on October
15, 1997, and all obligations thereunder were repaid in full on such date with
the proceeds from the Loan Facility with the Bishop Family Trust (Note 8). As
consideration for the early repayment of such obligations, the warrants issued
to the Bishops were canceled on October 15, 1997.
The Company has received several bridge loans from the Bishops payable on
demand (the "Bridge Loans"), which amounted to $400,000, plus interest, on
September 30, 1997. Interest accrued thereon at 10% per annum. The Bridge
Loans were repaid in full on October 15, 1997, with the proceeds from the Loan
Facility with the Bishop Family Trust.
NOTE 8. SUBSEQUENT EVENT
On October 15, 1997, the Company entered into a loan and security agreement
(the "Loan Facility") with John F. Bishop and Ann R. Bishop, trustees of the
Bishop Family Trust (the "Bishop Family Trust"). The Loan Facility provides for
a term loan of $1,000,000 and revolving advances up to $450,000. Interest is
charged at the prime rate plus 5% and is payable monthly (13.5% as of October
15, 1997). The Loan Facility expires on October 15, 1998. The Loan Facility
contains various restrictive covenants requiring, among other matters, the
achievement of profitability on a rolling 3-month basis commencing in August
1998, and the maintenance of minimum revenues from its OEM relationship
commencing in January 1998. The Bishop Family Trust also precludes or limits
the Company's ability to take certain actions, such as paying dividends, making
loans, making acquisitions or incurring indebtedness, without the Bishop Family
Trust's prior written consent. The Loan Facility is secured by substantially
all of the Company's assets. The Bishop Family Trust has subordinated the Loan
Facility to the Bank Line. At October 15, 1997, the Company was in compliance
with the restrictive covenants of the Loan Facility.
Under the terms of the Loan Facility, the Company will be obligated to pay
facility fees of up to $282,000 to the Bishop Family Trust in the manner
described below.
A. A facility fee of $70,500 was fully earned on October 22, 1997 and
will be payable by the Company on January 22, 1998.
B. If the principal amount of the obligations outstanding under the Loan
Facility on January 22, 1998 exceeds $1,000,000, then an additional facility fee
of $70,500 will be fully earned on such date and will be payable by the Company
on January 22, 1998.
C. If the principal amount of the obligations outstanding under the Loan
Facility on April 22, 1998 exceeds $1,000,000, then an additional facility fee
of $141,000 will be fully earned on such date and will be payable by the Company
on April 22, 1998.
26
<PAGE>
The Company will have the right to pay the facility fee in cash or by issuance
of Common Stock. The number of shares of Common Stock issuable as payment for a
facility fee will equal (a) the applicable facility fee divided by (b) the Fair
Market Value (as defined in the Loan Facility) per share of Common Stock on the
date such facility fee is payable to the Bishop Family Trust.
Future performance and levels of capital expenditures could reduce the
total amount of funds available under the Bank Line and the Loan Facility at any
given time.
NOTE 9. BOARD OF DIRECTORS' FEES
During fiscal 1996, the Board of Directors waived fees owed to them by the
Company totaling $112,000. The reversal of previously accrued fees was
included in "Interest and other, net" cost and expenses in the statement of
operations, and thereby reduced the net loss for the year ended September 30,
1996.
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of EIP Microwave, Inc.
We have audited the accompanying consolidated balance sheet of EIP
Microwave, Inc. and subsidiary as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements of EIP Microwave, Inc. and
subsidiary as of September 30, 1996 and for the years ended September 30, 1996
and 1995 were audited by other auditors whose report as of October 23, 1997
included an explanatory paragraph that described conditions that raise
substantial doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EIP
Microwave, Inc. and subsidiary as of September 30, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant recent losses from
operations and will need to obtain additional financing to meet its business
plans for fiscal 1998 and beyond. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ MEREDITH, CARDOZO, LANZ & CHIU LLP
MEREDITH, CARDOZO, LANZ & CHIU LLP
San Jose, California
November 20, 1997
28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company engaged Meredith, Cardozo, Lanz & Chiu LLP as its new
independent auditors as of October 9, 1997.
On October 9, 1997, EIP Microwave, Inc. (the "Company") dismissed Price
Waterhouse LLP as its independent auditors. The reports of Price Waterhouse LLP
on the financial statements for the years ended September 30, 1995 and 1996
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle, except that
their reissued report on the financial statements for the year ended
September 30, 1996, which was dual dated December 23, 1996 and October 23, 1997
includes an explanatory paragraph to express substantial doubt regarding the
Company's ability to continue as a going concern. The Company's Audit Committee
participated in and approved the decision to change independent auditors. In
connection with its audits for the two most recent fiscal years and through
October 9, 1997, there have been no disagreements with Price Waterhouse LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Price Waterhouse LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
Price Waterhouse LLP furnished the Company with a letter addressed to the
Securities and Exchange Commission stating that it agrees with the statements in
this paragraph.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under the captions "ELECTION OF DIRECTORS -
Information With Respect to the Class III Director Nominee, -Information With
Respect to Other Directors, and - Information With Respect to Executive
Officers", and "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS AND
TRANSACTIONS WITH MANAGEMENT AND OTHERS - Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement (the "Proxy
Statement") for the Annual Meeting of Stockholders scheduled to be held on
February 11, 1998, is incorporated herein by reference. The Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the close of fiscal year ended September 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the caption "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS AND TRANSACTIONS WITH MANAGEMENT AND OTHERS - Executive
Compensation, and - Compensation of Directors" in the Proxy Statement is
incorporated herein by reference.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS AND TRANSACTIONS WITH MANAGEMENT AND OTHERS - Certain
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT NO.
3(a) Company's Certificate of Incorporation, filed on April 29, 1987,
and Certificate of Amendment of Certificate of Incorporation,
filed February 8, 1993, previously filed on February 12, 1993, as
Exhibit 3(a) to Form 10-QSB Quarterly Report for quarter ended
December 31, 1992, and incorporated herein by reference.
3(b) Company's Bylaws, previously filed June 25, 1987 (File No.
0-5351), as Exhibit 3(b) to Form 8-K, and incorporated herein by
reference.
10(a) Standard Form Lease dated August 18, 1995, by and between Berg &
Berg Developers, as landlord, and the Company, as tenant, covering
the Company's manufacturing facility located at 1745 McCandless
Drive, Milpitas, California, previously filed on December 29,
1995, as Exhibit 10(a) to Form 10-KSB Annual Report for fiscal
year ended September 30, 1995, and incorporated herein by
reference.
10(b) Loan and Security Agreement dated March 10, 1992, between the
Company and Silicon Valley Bank, previously filed on May 14, 1992,
as Exhibit 10(a) to Form 10-Q Quarterly Report for quarter ended
March 31, 1992, and incorporated herein by reference.
10(c) Amendment to Loan Agreement dated December 20, 1994, between the
Company and Silicon Valley Bank, previously filed on December 29,
1994, as Exhibit 10(h) to Form 10-KSB Annual Report for fiscal
year ended September 30, 1994, and incorporated herein by
reference.
10(d) Loan Modification Agreement dated as of November 27, 1995, between
the Company and Silicon Valley Bank, previously filed on December
29, 1995, as Exhibit 10(i) to Form 10-KSB Annual Report for fiscal
year ended September 30, 1995, and incorporated herein by
reference.
10(e) Loan Modification Agreement dated as of June 28, 1996, between the
Company and Silicon Valley Bank, previously filed on August 13,
1996, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter
ended June 30, 1996, and incorporated herein by reference.
30
<PAGE>
10(f) Loan Modification Agreement dated as of November 15 , 1996 between
the Company and Silicon Valley Bank, previously filed on December
30, 1996, as Exhibit 10(f) to Form 10-KSB Annual Report for fiscal
year ended September 30, 1996, and incorporated herein by
reference.
10(g) Loan Modification Agreement dated as of January 15, 1997, between
the Company and Silicon Valley Bank, previously filed on May 13,
1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter
ended March 31, 1997, and incorporated herein by reference.
10(h) Loan Modification Agreement dated as of March 5, 1997, between the
Company and Silicon Valley Bank, previously filed on May 13, 1997,
as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended
March 31, 1997, and incorporated herein by reference.
10(i) Loan Modification Agreement dated as of November 13, 1997, between
the Company and Silicon Valley Bank, previously filed on December
18, 1997, as Exhibit 10(i) to Form SB-2 Registration Statement,
and incorporated herein by reference.
10(j) Loan and Security Agreement dated as of October 15, 1997, between
the Company and the Bishop Family Trust, previously filed on
November 14, 1997, as Exhibit 10(i) to Form SB-2/A Registration
Statement (No. 333-37289), and incorporated herein by reference.
10(k) Fixed Price Subcontract dated August 15, 1997, between the Company
and ManTech Systems Engineering Corporation, previously filed on
November 14, 1997, as Exhibit 10(j) to Form SB-2/A Registration
Statement (No. 333-37289), and incorporated herein by reference.
*10(l) Employment Agreement dated as of October 1, 1995, between the
Company and John F. Bishop, previously filed on December 29, 1995,
as Exhibit 10(k) to Form 10-KSB Annual Report for fiscal year
ended September 30, 1995, and incorporated herein by reference.
*10(m) Amendment dated November 20, 1996 to Employment Agreement between
the Company and John F. Bishop, previously filed on December 30,
1996, as Exhibit 10(i) to Form 10-KSB Annual Report for fiscal
year ended September 30, 1996, and incorporated herein by
reference.
*10(n) Company's medical reimbursement plan (entitled "Full Medical
Coverage") covering certain officers, previously filed on December
23, 1981 (File No. 0-5351), as Exhibit 10(o) to Form 10-K Annual
Report for fiscal year ended September 30, 1981, and incorporated
herein by reference.
*10(o) Company's Tax and Financial Counseling reimbursement plan covering
officers, previously filed on December 23, 1981 (File No. 0-5351),
as Exhibit 10(p) to Form 10-K Annual Report for fiscal year ended
September 30, 1981, and incorporated herein by reference.
*10(p) Written description of EIP Bonus Plan for Fiscal 1997, previously
filed on December 30, 1996, as Exhibit 10(l) to Form 10-KSB Annual
Report for fiscal year ended September 30, 1996, and incorporated
herein by reference.
- ------------------------------
* Management contract or compensatory plan or arrangement.
31
<PAGE>
10(q) Second Amended and Restated 1994 Stock Option Plan, previously
filed on December 30, 1996, as Exhibit 10(n) to Form 10-KSB Annual
Report for fiscal year ended September 30, 1996, and incorporated
herein by reference.
*10(r) Non-qualified Stock Option Agreement-Form, previously filed on
December 29, 1995, as Exhibit 10(v) to Form 10-KSB Annual Report
for fiscal year ended September 30, 1995, and incorporated herein
by reference.
*10(s) Incentive Stock Option Agreement-Form, previously filed on
December 29, 1995, as Exhibit 10(w) to Form 10-KSB Annual Report
for fiscal year ended September 30, 1995, and incorporated herein
by reference.
10(t) Indemnification Agreement dated July 15, 1992, between the Company
and John B. Bishop, previously filed on December 20, 1992, as
Exhibit 10(n) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1992, and incorporated herein by reference.
10(u) Indemnification Agreement dated July 15, 1992, between the Company
and Robert D. Johnson, previously filed on December 20, 1992, as
Exhibit 10(o) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1992, and incorporated herein by reference.
10(v) Indemnification Agreement dated July 15, 1992, between the Company
and James J. Shelton, previously filed on December 20, 1992, as
Exhibit 10(p) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1992, and incorporated herein by reference.
10(w) Indemnification Agreement dated July 15, 1992, between the Company
and J. Sidney Webb, Jr., previously filed on December 20, 1992, as
Exhibit 10(q) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1992, and incorporated herein by reference.
10(x) Indemnification Agreement dated July 15, 1992, between the Company
and John F. Bishop, previously filed on December 23, 1993, as
Exhibit 10(m) to Form 10-KSB Annual Report, for fiscal year 1993
(the "1993 Annual Report"), and incorporated herein by reference.
10(y) Indemnification Agreement dated February 13, 1996, between the
Company and Michael E. Johnson, previously filed on May 9, 1996,
as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended
March 31, 1996, and incorporated herein by reference.
10(z) Indemnification Agreement dated February 19, 1997, between the
Company and Lewis R. Foster, previously filed on May 13, 1997, as
Exhibit 10(c) to Form 10-QSB Quarterly Report for quarter ended
March 31, 1997, and incorporated herein by reference.
10(aa) Indemnification Agreement dated February 19, 1997, between the
Company and Ivan Andres, previously filed on May 13, 1997, as
Exhibit 10(d) to Form 10-QSB Quarterly Report for quarter ended
March 31, 1997), and incorporated herein by reference.
- ------------------------------
* Management contract or compensatory plan or arrangement.
32
<PAGE>
10(bb) OEM Purchase Agreement effective on May 28, 1997, previously
filed on August 14, 1997, as Exhibit 10(a) to Form 10-QSB
Quarterly Report for quarter ended June 30, 1997, and
incorporated herein by reference.
16 Letter dated November 13, 1997 from Price Waterhouse LLP to the
Securities and Exchange Commission, previously filed on November
14, 1997, as Exhibit 16 to Form 8-K/A Current Report, and
incorporated herein by reference.
21 Subsidiaries of the Company, previously filed on December 30,
1996, as Exhibit 21 to the 1996 Annual Report, and incorporated
herein by reference.
27 Financial Data Schedule
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EIP MICROWAVE, INC.
December 29, 1997 By: /s/ J. Bradford Bishop
-----------------------
J. Bradford Bishop
Chairman of the Board
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ J. Bradford Bishop Chairman of the Board,
- ------------------------- Chief Executive Officer and Director December 29, 1997
J. Bradford Bishop (Principal Executive Officer)
/s/ John F. Bishop Vice Chairman, Treasurer, Secretary, December 29, 1997
- ------------------------- and Director (Principal Financial Officer)
John F. Bishop
/s/ Michael E. Johnson
- -------------------------
Michael E. Johnson Director December 29, 1997
/s/ Robert D. Johnson
- -------------------------
Robert D. Johnson Director December 29, 1997
/s/ J. Sidney Webb
- -------------------------
J. Sidney Webb Director December 29, 1997
/s/ E. O. Bince Controller (Principal Accounting Officer) December 29, 1997
- -------------------------
E. O. Bince
</TABLE>
34
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 250
<SECURITIES> 30
<RECEIVABLES> 455
<ALLOWANCES> 50
<INVENTORY> 1,023
<CURRENT-ASSETS> 1,770
<PP&E> 5,311
<DEPRECIATION> 4,721
<TOTAL-ASSETS> 2,360
<CURRENT-LIABILITIES> 1,760
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> (68)
<TOTAL-LIABILITY-AND-EQUITY> 2,360
<SALES> 4,739
<TOTAL-REVENUES> 4,739
<CGS> 2,955
<TOTAL-COSTS> 2,955
<OTHER-EXPENSES> 3,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,290)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,290)
<EPS-PRIMARY> (3.04)
<EPS-DILUTED> (3.04)
</TABLE>
